Lulled into over confidence?

This week has been a good week for day trading, a little slow but that just leads to more careful trades even if they are not big movers. We were going to play SPY puts today, too bad that we didn't but we got into three other trades that were decent. Today actually was double my last four days, that makes it a good day... or more to the point, the rest of the week a small week.

Having said that the week has seen nothing but winning trades. A couple were close enough that the commissions put them a dollar or two into the red but I don't really count the commissions when judging a trade a winner or loser until the final daily and monthly tally.

Today my extra cash hit my trading account. Now it is going to remain in Canadian dollars as it is only a buffer and I really don't expect to need to use it but I do count it into the base cash to work with when running my trade size calculations. I anticipate withdrawing it in the near future so converting it is just incurring additional fees for nothing...cheaper to borrow USD against it in the remote chance that I need it for an active trade. This lets me pull trade sizes up to the $700. I mentioned the rest of the week being smaller, it was not so much due to smaller profit trades, although that was a factor, it was due to starting out with $333 trades. I miscalculated my trade sizing due to an old factor I had in one of my formulae to aim at keeping trades as a smaller percentage of my account once it got going. I didn't follow it as well as I ought to have.

$333 is almost too small to day trade options with as a 10-15% profit on the trade is only $30-$50 while commissions start at $15.40 for a single contract. Workable, but really tight. I like $700 as a minimum trade size then factor it up from there.

Seeing as one of my issues was getting trade sizing too big too fast in addition to those trades being held too long as swings I will be keeping them at $700 for a bit in order to not get too top heavy in the next batch of trades next week. I also expect that we will be placing more trades starting next week so now I want to have more trades possible to take advantage of every single trade called out.

Perhaps I should only review trade sizing each week rather than each day. That would avoid using recent profits in the new trades which might only serve to increase a loss on the next trade. Either that or keep doing it daily but increment the trade size increases. Say there is a good $500 day spread that out to the next 5 days in trade increases. That way I would gradually increase profits but also more gradually increase risk. I did far too much bouncing around with trade sizing in the past.

Hmmm.... best idea I think is to treat profits in a delayed manner. This week will be tallied up and only added to the trades in the week after next and even then roll them in incrementally while continuing to keep a percentage out of the trades in order to preserve cash in the case of a drawdown... which should be far less onerous than the last two. This serves to keep my over confidence in check as I do not just plunk winnings into the next trade and risk squandering them.

Jeff.

Day trading comforts.

I finished the day without even giving what the market did after noon a second thought, in fact it never even got a first thought.

It is nice to be in and out of all trades in the morning and not be concerned in the least with what else is going on meanwhile.

Nice.

Jeff.

Another fresh start?

When I started my daytrading I started with around $6700 in an account and I almost doubled that in 2 months using a few ideas about money management that were more than a little off. Basically I may have lucked out in that those two months were very good months as a lot of the trades were winners and a lot were largish winners at that, I recall one that was over $3.00 per contract, that was a very good day.

Average trade per contract profits have been declining after a nice bump in May. These numbers reflect losing trades as well.

April = $0.20

May = $ 0.33

June = $ 0.11

July = $ 0.10

August = $ 0.06

This causes me some concern as my break even on some trades is as high as 8 cents on a small 2 contract trade... having said that a 2 contract trade is usually a more expensive price like $3.40 trade today. On this sort of trade even a 10% gain is 34cents so it is not as bad as it sounds. A 50 cent trade would be maybe 15 contracts and the breakeven would be 2.4 cents.

The long and short is that money management is more critical when trading smaller average gains as a large loss will wipe out profits that might take many trades to overcome instead of just a few. Of about 38 trades this month there have been 10 losers which is a 73% win rate, not bad.

April = 75.6%

May = 78%

June = 85.9%

July = 78..8%

August = 73%

This goes to show me that a large win rate is not the only thing needed to stay ahead of the game in trading. If I were running my own trades I would have stopped out of more than a few of the losers to keep losses from getting ahead of me as most of the larger losing trades, if not all of them, had to do with swing trading a day trade.

Seeing as we are not currently swing trading anything and will likely be advised prior to a trade being entered that it will be a swing I feel confident that I can manage those trades better. If we do enter a swing I have some rules to look after stop losses and complete exits. I figure that, seeing as the swings were the biggest losers, even if some of them won big as well, they are best to not enter at all, generally speaking, or at least entering with a smaller profit target and stop loss assigned.

Jeff.

At the mercy of the service

AKA scourge of the lowest common denominator.

Today we took two trades, AAPL and NFLX. We held the puts for about 10 or 15 minutes and sold them for a small 10% gain. This was rather than hold them beyond the scope of the morning trade time...although even had we held them for another 20 minutes the returns would be at least doubled.

The idea was that seeing as most people did not observe proper money management John felt that it best if we got out of trades very fast and definitely not hold them overnight. I expect to see some similar trades over the rest of the week. While I don't mind them I dislike trades being closed prematurely.

I think he was just trying to make a point.

One trade we got into at $2.30 (AAPL), and the other at $3.30 (NFLX). Both were closed for about 20 cent gains. Both went on to hit $3.95 and $4.40 by 1030h respectively. That was $1.65 and $1.10. By days end, had we just closed the trades near the end of day, which would be my idea instead of holding them, the prices were at $5.60 and $4.40. Those are some really nice gains. Seeing as it was mentioned that the trades were being closed due to his lack of faith in subscriber's money management skills that should have been a hint to hold the trades open for longer on our own... that was mentioned after the fact though.

Due to my small trading size my profits were $60. Better than a loss, I'll admit, but no great day.

Tomorrow everyone will whine that we should have held... John knows that. I am sure that he expects that.

What really sucks is one of the trades that expired on Friday was AAPL. We had puts on the $240 strike and today it plummets to hit $245. Go figure.

Jeff.

Next to final analysis

In going over all of my trading since starting with the daytrading options in March I have come to a conclusion that explains my entire problem with this rather huge draw down.

Over confidence mixed with a little greed.

My posts outline my plan and therefore my problem in that I kept trying to increase my position sizing in a maximum profit plan... which is a maximum risk scenario as it turns out. I failed to recognize this important fact and I was considering potential profits mixed in with my current trading. Mixing the future with the present is not prudent in trading as the future is really only speculation.

Seeing as I was doing so well I projected my success into the future and failed to take into account projected losing trades as I increased my position sizing according to potential profits. I should have (always the should haves) optimized according to a smaller trading capital and left a larger buffer so that, in the case where a bunch of swing trades went south at once, I would be able to continue with my trading at the exact same size as I had all along. This would have served to mitigate the losses as we have booked enough wins that I would have more than made up for the losses.

Also, had I known ahead of time that the swings were going to be swings (for the held daytrades anyway) I would not have loaded up on them as I did knowing that we may be recommended to add to them. So my plan could have been to close all but a small portion of the position once it was determined that we were going to hold them thus realizing a small loss on that portion while allowing the balance to run in case it worked out. Either that or just set a GTC stop loss on the whole thing at 20-30%.

Playing a lot smaller would have reduced my profits on the winners while reducing my losses on the losers and stopping out of swings for a smaller loss would stop the 100% large losers altogether. I could have stayed larger with the daytrades and only managed the swings as mentioned above as my daytrades are closed each day and with the win rate I would be MUCH farther ahead.

Now I have no choice but play smaller as a result of my blunders.

Having said that I made a swing trade of one contract two days ago that I just closed for $201 profit. Next Week we will be playing mostly SPY options and the like, lots of liquidity so many traders cannot affect the prices to the detriment of the rest of the group... too many rogue traders right now to worry about with thinly traded options. That suites me just fine as it was a suggestion of mine to play these each day anyway.

Jeff.

Curse those swings!

I've been busy lately so not much posting. Trading is poking along, summer doldrums as there is very little volume which ends up equating to very little to really sink our teeth into for day trading.

Sitting on these swing trades, which are really just failed day trades, is very annoying and very expensive. I do not plan on continuing to hold those types of trades going forward. I haven't done it yet but I am going to rework my spreadsheets to estimate the difference in profits between holding these trades through or exiting by the end of the morning session.

The trouble right now is that I have sunk too much cash into these trades and I am down a ton, should they all not work out now I will be wittled down to a very small trading capital. In that case I will need to really reconsider my trading in future.

Perhaps not closing out the entire trade but closing half of it might be the best method as that allows some of the possibility of a profit in the gaps or runs that do occur while lessening the overall exposure. The issue that I do have is that too often we are recommended to buy more at a better price, this just serves to increase the overall exposure in a trade that is already headed in the wrong direction. I may consider that if I do close the whole position I have the option of buying back in at the next low suggested price which puts me in a better position to profit at that point compared to the rest of the room.

I'll see where the week ends.

Jeff.

Less than two weeks to D-day

August option expiration is next week and I have positions that are too large due to past sizing rules. It is not so much that they were initially too large but that we, as a group, increased the sizing when the prices were better in order to average the cost down. That and I changed my sizing after getting into some of these. In order to take full advantage of the total trading plan I followed along and bought more of some positions as recommended... knowing that these were swing trades and knowing that I probably should have just left well enough alone. The trouble is that if a adding more contracts is called for then the average cost is the consideration when selling to determine if a profit is to be had...therefore if I do not enter the second string I run the risk of having to sell for a loss when the group is selling for a profit.

I need to rethink that process.

As a group we are all supposed to know how to properly size and manage our accounts, which is fine, and I expect to take some hits in order to learn some of what I may not know or may not have tuned in yet. The issue has been that the trades that are supposed to be day trades have turned into swing trades. I have managed my account according to daytrading rules only to have some of these trades turn into swing trades after they did not work out in the morning trading. In hind sight I should have just closed any and all trades that were closing for a loss at the end of trading in the morning. Either that or just "re-sized" them to hold a much smaller position over. This would have let me still continue my daytrading as planned and also allowed me to take advantage of some of the swing trades with a minimum risk.

I don't mind holding a trade for a few days but holding through to expiration does two things:

1) it risks the option expiring worthless for a total loss of the position

2) it ties up that cash that could be used to day trade regularly therefore making up for any smaller losses.

I do not have trade records to be able to run the numbers for closing trades at the end of morning trading compared to holding them over but given the size of the trades right now I know that any loss would have been at least mitigated if not eliminated.

All in all the market is looking pretty bedraggled and ready to do some serious plummeting so I would hate to cash out only to miss some nice gains as a result. That is the crux of the situation as it stands now.

Jeff.

...and the room shifts again

Another fresh month for trading and another small batch of new traders enters the trading room. No big deal as we are locking down comments during the first bit of trading to keep the chatter out of the picture, less distracting that way.

We have shifted the scope once again as we are now going to concentrate on more true day trades and add selling options into the mix as well as not taking on nearly as many overnight trades... we'll see about that one.

I am working with a much smaller account base now due to a bunch of held trades that I would have preferred not to still be in, and perhaps not at the sizes that they are at. Even though they were sized according to my rules at the time they are bigger than what they maybe should have been as I have lowered my sizing even based on my previous account size.

If I go back to an old 5% of account risk rule it would put any account at 20 trades. Based on that a $20K account would have a $1000 per trade limit as any held option trade is considered a loss allowance, same as a stock trade losing $1000 no matter the price of the stock.

This obviously allows options to be traded in greater quantity as 20 trades are possible whereas stocks, say in the $30 range, would take about $10K of the account to allow a $3 stop loss (10% of the stock price).

So, this being the case, all held option trades would be considered a fair loss if they expire worthless and loose 100% of their value.

But, in a true day trade the loss is often capped at 20 - 30 cents per contract due to the short term nature of the trade. Yes, they can also be as high as $1 but normally the stop is dependent upon the pattern and activity at the time. Perhaps 50% of the price could be considered a normal maximum stop loss for options... if we knew ahead that they were not going to be held over. The trouble with using 50% is that it can effectively double the trade size, not a good idea.

All in all I expect that, once I get all the held trades closed, whether profitable or otherwise, I will be reviewing what sized trades I will plan on making regularly... yet once again.

Currently I am playing with $700 trades in order to allow enough cash to provide for a few trades at a time as a lot of cash is really tied up right now. This is on the small size as a small size should be about $1000, medium $2000 and large $3000. $700 is about as small as I can get and still see enough profit to overcome the commissions nicely as break even is between 2 and 6 cents depending upon the position size.

Long trading day today as we got into a trade that is taking forever. It also happens to be a naked short call play and we certainly don't want to leave it alone unsupervised so we are babysitting this one. I say we loosely as I just took a different strike put instead. I actually have been in and out for a profit already and bought back in later... perhaps I should have just stayed out of the second trade but this is fun too.

Jeff.